DBRS Confirms JPMorgan Chase & Co. at A (high), Revises Trend to Positive

DBRS, Inc. (DBRS) has today confirmed all ratings for JPMorgan Chase & Co. (JPMorgan or the Company) and related entities, including JPMorgan’s Issuer & Senior Debt rating of A (high) and its Short-Term Instruments rating of R-1 (middle). Additionally, the trend on all long-term ratings and some short-term ratings has been revised to Positive from Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

JPMorgan’s ratings reflect its diversified and highly scaled universal banking franchise, its robust and resilient earnings generation across its businesses, and its overall solid financial profile. The Company’s large U.S. branch banking franchise, leading credit card business and other nationwide lending businesses, as well as its solid commercial banking franchise provides for stable revenue generation, as well as geographic diversity. Additionally, the Company’s large global capital markets business, with top-tier rankings across numerous banking, markets and investor products and services, along with its extensive global fee-based businesses, including its sizable treasury and securities services, asset management and private banking businesses, adds to JPMorgan’s overall diversity. Collectively, DBRS views JPMorgan as one of the banking industry’s top franchises. The ratings also consider the heightened regulatory scrutiny and enhanced capital demands that come with being a large, complex, globally systemically important bank (G-SIB).

The Positive trend considers the Company’s ongoing success in advancing its franchise, building capital and delivering sustained and strong financial results, despite the difficult operating environment. These results, in DBRS’s view, demonstrate JPMorgan’s ability to succeed in an environment that includes low interest rates and heightened regulatory scrutiny. DBRS also takes into account the range of actions that JPMorgan has taken to materially reduce its risk profile and address the complexity in its businesses. Continued progress in adjusting to evolving regulatory requirements while sustaining strong financial results without elevating its risk profile, could lead to an upgrade.

Conversely, a negative rating action could arise if investor/client confidence is adversely impacted by a JPMorgan-specific scenario, particularly a large event, or if it is unable to reasonably settle its ongoing legal liabilities. DBRS would view any resultant signs of franchise impairment, significant new misconduct or material reversal of earnings momentum as potentially negatively pressuring the rating. Additionally, an increase in risk appetite to compensate for increased regulatory capital requirements would be viewed negatively.

The ratings are supported by the Company’s deep and diverse business model. For 9M15, JPMorgan reported net income of $19 billion on revenue of $70.7 billion, as compared to net income of $16.8 billion on net revenues of $73.4 billion for 9M14. Net revenue was down 2% due to lower CIB Fixed Income Markets revenue, lower mortgage banking revenue, and lower private equity gains partially offset by higher CIB Equity Markets revenue and higher firm-wide investment banking fees. Meanwhile, noninterest expense decreased by 2% driven by lower CIB expense related to compensation and business simplification and lower professional and outside services expense, partially offset by higher legal expense. DBRS notes that JPMorgan remains focused on reducing expenses through further simplification of its business model and improved technology. Over the intermediate term, JPMorgan expects its overhead ratio on a managed basis to be around 55%, which would be a substantial improvement from 9M15’s 63%.

JPMorgan’s solid balance sheet including its strong funding and liquidity profile, which is anchored by its $1.3 trillion global deposit base, the largest among U.S. banks. Reflecting the Company’s business mix and funding needs, wholesale funding reliance is sizable, but has trended down. Moreover, DBRS views JPMorgan’s funding and liquidity as well-managed and appropriately diversified across both sources and maturities. The need for additional wholesale funding at the holding company as a result of the proposed TLAC rules will also weigh on large banks’ wholesale funding requirements, and potentially profitability, as the rule starts being phased-in in January 2019.

Capital levels remain solid with strong earnings enabling organic capital generation and retention. DBRS expects JPMorgan’s capitalization will remain sound and improve over the intermediate term, as it adjusts to new regulatory requirements. Moreover, a smaller balance sheet and capital retention also helped improve the Company’s CET1 and supplementary leverage ratios. Also important to its performance, however, is JPM’s ability to refine its business model successfully despite higher regulatory capital requirements; a competitive disadvantage.

Positively, in 3Q15, JPMorgan was able to further reduce non-operational deposits, as well as total assets despite strong core loan growth, as the Company works to simplify its balance sheet. As a result of these actions, JPMorgan now believes it falls firmly in the 4% G-SIB surcharge bucket rather than the 4.5% bucket it was in previously.

With over $2.4 trillion in assets, JPMorgan is the largest financial institution in the U.S.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria - Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: 22 June 2001
Most Recent Rating Update: 27 June 2014

For additional information on this rating, please refer to the linking document under Related Research.